Question

The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2018, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2017, in exchange for various considerations totaling $420,000. At the acquisition date, the fair value of the noncontrolling interest was $280,000 and Keller’s book value was $550,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $150,000. This intangible asset is being amortized over 20 years.

Gibson sold Keller land with a book value of $70,000 on January 2, 2017, for $140,000. Keller still holds this land at the end of the current year.

Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $130,000 to Gibson at a price of $200,000. During 2018, intra-entity shipments totaled $250,000, although the original cost to Keller was only $150,000. In each of these years, 20 percent of the merchandise was not resold to outside parties until the period following the transfer. Gibson owes Keller $70,000 at the end of 2018.

	Gibson Company				Keller Company
Sales	$	(850,000	)		$	(550,000	)
Cost of goods sold		550,000				350,000
Operating expenses		150,000				50,000
Equity in earnings of Keller		(90,000	)			0
Net income	$	(240,000	)		$	(150,000	)
Retained earnings, 1/1/18	$	(1,166,000	)		$	(645,000	)
Net income (above)		(240,000	)			(150,000	)
Dividends declared		140,000				50,000
Retained earnings, 12/31/18	$	(1,266,000	)		$	(745,000	)
Cash	$	174,000			$	60,000
Accounts receivable		366,000				460,000
Inventory		440,000				370,000
Investment in Keller		813,000				0
Land		160,000				440,000
Buildings and equipment (net)		501,000				350,000
Total assets	$	2,454,000			$	1,680,000
Liabilities	$	(548,000	)		$	(475,000	)
Common stock		(640,000	)			(370,000	)
Additional paid-in capital		0				(90,000	)
Retained earnings, 12/31/18		(1,266,000	)			(745,000	)
Total liabilities and equities	$	(2,454,000	)		$	(1,680,000	)

Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller.

How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $85,000 book value (cost of $190,000) to Keller for $150,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.

Answer 1

Consideration transferred ................................... $900,000

            Noncontrolling interest fair value........................     600,000

            Subsidiary fair value at acquisition-date .......... $1,500,000

            Book value................................................................. (1,200,000)

            Fair value in excess of book value ..................... $300,000                 Annual Excess

                  Excess fair value assignment ........................                      Life        Amortizations

                  to customer list...................................................     300,000   20 yrs.        $15,000

                                                                                                          -0-                                     

            a.   CONSOLIDATION ENTRIES

                  Entry *TL

                        Retained Earnings, 1/1/18 (Gibson) .................           75,000

                              Land ..................................................................                                   75,000

            To remove unrealized gain on Intra-entity downstream transfer of land made in 2017.

      Entry *G

            Retained Earnings, 1/1/18 (Keller) ...................           24,500

                  Cost of Goods Sold .......................................                                   24,500

            To defer unrealized upstream Inventory gross profit from 2017 until 2018 computed as the 2017 ending inventory balance of $70,000 (20% × $350,000) multiplied by 35% gross profit rate ($122,500 ÷$350,000).

      Entry *C

            Retained Earnings, 1/1/18 (Gibson) .................           23,700

                  Investment in Keller .......................................                                   23,700

            Parent is applying the partial equity method as can be seen by the amount in the Income of Keller Company account (60 percent of the reported balance). Thus, the parent’s share of amortization of $9,000 ($300,000 divided by 20 years × 60%) must be recognized for the previous year 2017. In addition, the equity accrual recorded by the parent has been based on Keller's reported net income. As shown in Entry *G, $24,500 of that reported net income has not actually been realized as of January 1, 2018. Thus, the previous accrual must be reduced by $14,700 to mirror the parent's 60% ownership. The total of the two adjustments being made here is $23,700.

     

      Entry S

            Common Stock(Keller) .......................................         520,000

            Additional Paid-In Capital ..................................           80,000

            Retained Earnings, 1/1/18 (Keller) (adjusted

                  for Entry *G) .....................................................         695,500

                        Investment in Keller (60%) .....................                                 777,300

                        Noncontrolling Interest in Keller, 1/1/18 (40%)                   518,200

            To remove stockholders' equity accounts of Keller and recognize beginning noncontrolling interest. Retained earnings balance has been adjusted in Entry *G.

      Entry A

            Customer List........................................................         285,000

                  Investment in Keller .......................................                                 171,000

                  Noncontrolling Interest in Keller, 1/1/18 (40%)                         114,000

            To recognize amount paid within acquisition price for the customer list. Original balance is adjusted for previous year’s amortization.

      Entry I

            Income of Keller ...................................................           87,000

                  Investment in Keller .......................................                                   87,000

            To eliminate intra-entity income accrual.

      Entry D

            Investment in Keller .............................................           42,000

                  Dividends Paid ...............................................                                   42,000

            To eliminate intra-entity dividend transfers—60% of subsidiary's payment.

      Entry E

            Amortization Expense.........................................           15,000

                  Customer List .................................................                                   15,000

            To recognize current period excess amortization expense.

      Entry P

            Liabilities.................................................................           60,000

                  Accounts Receivable ....................................                                   60,000

            To eliminate intra-entity debt.

      Entry Tl

            Sales.........................................................................         400,000

                  Cost of Goods Sold .......................................                                 400,000

            To eliminate current year intra-entity inventory transfer.

     

Entry G

            Cost of Goods Sold .............................................           32,000

                  Inventory...........................................................                                   32,000

            To defer 2018 unrealized inventory gross profit. Unrealized gain is the ending inventory of $80,000 (20% of $400,000) multiplied by 40% gross profit rate ($160,000 ÷ $400,000).

      Noncontrolling Interest in Keller's Net Income

      Keller reported net income ...............................................................     $145,000

                  Excess fair value amortization .........................................................         (15,000)

      2017 Intra-entity gross profit realized in 2018 (inventory)..........          24,500

      2018 Intra-entity gross profit deferred (inventory) ......................         (32,000)

      Keller realized income 2018...............................................................     $122,500

      Outside ownership percentage .......................................................              40%

            Noncontrolling interest in Keller's net income                             $ 49,000

                                                                                            GIBSON AND KELLER

Consolidation Worksheet

Year Ending December 31, 2018

                                                                                                              Consolidation Entries Noncontrolling   Consolidated

                  Accounts                            Gibson               Keller                Debit               Credit        Interest              Totals

Sales                                                 (1,000,000)           (700,000)    (TI)   400,000                                                       (1,300,000)

Cost of goods sold                                700,000             500,000     (G)     32,000      (*G)   24,500                                    807,500

                                                                                                                              (TI) 400,000

Operating expenses                              190,000              55,000   (E)       15,000                                                            260,000

Income of Keller                                    (87,000)                   -0-     (I)      87,000                                                                    -0-

Separate company net income (197,000) (145,000)

Consolidated net income                                                                                                                                           (232,500)

   To noncontrolling interest                                                                                                                  (49,000)            49,000

To parent                                                                                                                                                                (183,500)

RE, 1/1/18—Gibson                           (1,316,000)                           (*TL) 75,000                                                       (1,217,300)

                                                                                                   (*C)      23,700

RE, 1/1/18—Keller                                                        (720,000)    (*G)    24,500

                                                                                                    (S)    695,500

Net income (above)                              (197,000)           (145,000)                                                                                 (183,500)

Dividends                                              125,000              70,000                             (D)     42,000              28,000           125,000

   Retained earnings, 12/31/18           (1,388,000)           (795,000)                                                                              (1,275,800)

Cash                                                    189,000              60,000                                                                                    249,000

Accounts receivable                             396,000             610,000                             (P)     60,000                                    946,000

Inventory                                              590,000             520,000                             (G)     32,000                                 1,078,000

Investment in Keller                           1,017,000                             (D)     42,000   (*C)     23,700                                            -0-

                                                                                                                             (S)   777,300

                                                                                                                             (I)      87,000

                                                                                                                           (A)     171,000

Land                                                     170,000             590,000                            (*TL) 75,000                                    685,000

Buildings and equipment (net)              516,000             500,000                                                                                 1,016,000

Customer list                                                                               (A)     285,000   (E)       15,000                                   270,000

   Total assets                                    2,878,000          2,280,000                                                                                4,244,000

Liabilities                                            (700,000)           (885,000)    (P)     60,000                                                       (1,525,000)

Common stock                                    (790,000)           (520,000)    (S)   520,000                                                          (790,000)

Additional paid-in capital                                              (80,000)    (S)     80,000                                                                      

Retained earnings, 12/31/18              (1,388,000)           (795,000)                                                                              (1,275,800)

NCI in Keller, 1/1/18                                                                                               (S)   518,200            (518,200)

                                                                                                                           (A)     114,000            (114,000)

NCI In Keller, 12/31/18                                                                                                                         653,200         (653,200)

   Total liabilities and equity              (2,878,000)        (2,280,000)         2,339,700         2,339,700                               (4,244,000)

b.   If the intra-entity transfer had been a building rather than land, two adjustments to the consolidation entries would be needed. Entry *TL would be changed and relabeled as Entry *TA and an Entry ED would be added to eliminate the overstatement of depreciation expense for 2018. All other consolidation entries would be the same as shown in Part a. As a downstream transfer, entries *C and S are not affected.

      Entry *TA

            Retained Earnings, 1/1/18 (Gibson) .................         126,000

            Buildings ................................................................           40,000

                  Accumulated Depreciation ..........................                                 166,000

            To defer unrealized gain ($140,000 original amount less one year of excess depreciation at $14,000 per year) as of beginning of year. Entry also returns Buildings account to historical cost (from $300,000 to $340,000) and Accumulated Depreciation account to historical cost (original $180,000 less one year of excess depreciation at $14,000). Because the Buildings account is shown at net value in the information given in this problem, the above entry would probably be made as follows:

      Entry *TA (Alternative)

            Retained Earnings, 1/1/18 (Gibson) .................         126,000

                  Buildings (net) ................................................                                 126,000

      Entry ED

            Accumulated Depreciation ................................           14,000

                  Operating (or Depreciation) Expense .......                                   14,000

            To remove excess depreciation for current year created by transfer price. Excess depreciation for each year would be $14,000 based on allocating the $160,000 historical cost book value over 10 years ($16,000 per year) rather than the $300,000 transfer price ($30,000 per year).